AUD/USD extends recovery above 0.7100 despite cautious market mood

• AUD/USD has scaled to near 0.7115 after a recovery, despite solidifying cautionary market mood.
• The Fed might hike interest rates by 25 bps and keep them steady at 4.75-5.00% for the remaining year.
• Australian monthly Retail Sales are expected to display de-growth by 0.3%.

The AUD/USD pair has accelerated to near 0.7115 after rebounding from below 0.7095 in the Asian session. The Aussie asset is scaling firmly higher despite caution in the market sentiment.

S&P500 futures are showing selling pressure in the Asian session as investors are dubious about whether to ditch United States equities due to softening demand or add them amid expectations of a further slowdown in the inflation projections. The US Dollar Index (DXY) hovers around 101.50 after a downside move. It is expected to remain on the tenterhooks as investors will keep an eye on chatters ahead of the interest rate decision by the Federal Reserve (Fed).

Meanwhile, the 10-year US Treasury yields have climbed to near 3.52% as Fed chair Jerome Powell is set to hike interest rates further.

Analysts at Rabobank point out that it has become increasingly likely that the Fed will slow down its hiking cycle to 25 bps. For the interest rate guidance, “We continue to think that based on the fading momentum of inflation, the Federal Open Market Committee (FOMC) is likely to stop at a 4.75-5.00% target range and pause for the remainder of the year.”

Easing supply chain disruptions and a decline in overall demand have softened inflation projections, and the worst is behind us. However, the labor cost index and tight labor market are still major concerns for Fed policymakers.

On the Aussie front, investors are awaiting the release of the monthly Australian Retail Sales data for fresh cues. Tuesday’s monthly retail sales indicate a de-growth of 0.3% vs. the former expansion of 1.4%. Declining retail demand might impact the red-hot Australian inflation, which has reached 7.8%, as reported last week, in the fourth quarter of CY2022. The Reserve Bank of Australia (RBA) is expected to continue hiking interest rates further to tame soaring inflation.